Fiscal deficits and current account deficits

Michael Kumhof and Douglas Laxton

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 10, 2062-2082

Abstract: Recent fiscal stimulus packages depend for their effectiveness on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, higher fiscal deficits can have problematic implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50% of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75% for a large economy such as the United States, and almost 100% for a small open economy.

Keywords: Non-Ricardian households; Government deficits; Government debt; Global current account imbalances (search for similar items in EconPapers)
JEL-codes: E62 F41 F42 H30 H63 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Fiscal Deficits and Current Account Deficits (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:10:p:2062-2082

DOI: 10.1016/j.jedc.2013.05.001

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